Over the past decade, the federal government has taken significant steps to encourage the development of...

Over the past decade, the federal government has taken significant steps to encourage the development of ethanol and other fuels made from plants as a partial replacement for gasoline. These actions have been undertaken by politicians in the midst of public concerns about the dependence on foreign oil, war in the Middle East, and global warming. The primary input for ethanol production is corn. In 2011, the 13.9 billion gallons of ethanol produced in the United States consumed over 20 percent of the domestic corn supply. Suppose that the government has just passed new legislation mandating increased annual pro- duction of corn ethanol. You manage the Hog Heaven restaurant chain. Your restaurant chain, which has about 300 outlets throughout the United States, specializes in barbecue pork dishes but also offers chicken, beef, and vegetarian meals. Currently about 80 percent of your revenue comes from your pork dishes. The price of pork has a major impact on your costs. You are concerned that the federal promotion of ethanol might have an impact on pork prices and the profitability of your restaurant chain. Feed cost is typically about 50 to 60 percent of the total cost of production of pork producers. About 80 percent of the feed that hogs consume is corn.

Use basic supply and demand analysis to illustrate the likely effect of the government’s man- dated increase of ethanol production on (1) corn prices and (2) pork prices and What actions might you consider given the results of your analysis?

Expert Solution

Rahul Sunny answered 2 years ago

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